Types of Accounting
Accounting is a vast and dynamic profession and is constantly adapting itself to the specific and varying needs of its users. Over the past few decades, accountancy has branched out into different types of accounting to cater for the diversity of needs of its users.
Financial Accounting
Financial accounting is the process of producing information for external use usually in the form of financial statements. Financial Statements reflect an entity’s past performance and current position based on a set of standards and guidelines known as GAAP (Generally Accepted Accounting Principles). GAAP refers to the standard framework of guideline for financial accounting used in any given jurisdiction. This generally includes accounting standards (e.g. International Financial Reporting Standards), accounting conventions, and rules and regulations that accountants must follow in the in the preparation of the financial statements.
Management Accounting
Management accounting produces information primarily for internal use by the company’s management. The information produced is generally more detailed than that produced for external use to enable effective organization control and the fulfillment of the strategic aims and objectives of the entity. Information may be in the form budgets and forecasts, enabling an enterprise to plan effectively for its future or may include an assessment based on its past performance and results. The form and content of any report produced in the process is purely upon management’s discretion.
Cost accounting is a branch of management accounting and involves the application of various techniques to monitor and control costs. Its application is more suited to manufacturing concerns.
Governmental Accounting
Also known as public accounting or federal accounting, governmental accounting refers to the type of accounting information system used in the public sector. This is a slight deviation from the financial accounting system used in the private sector. The need to have a separate accounting system for the public sector arises because of the different aims and objectives of the state owned and privately owned institutions. Governmental accounting ensures the financial position and performance of the public sector institutions are set in budgetary context since financial constraints are often a major concern of many governments. Separate rules are followed in many jurisdictions to account for the transactions and events of public entities.
Tax Accounting
As the name implies, tax accounting refers to accounting for the tax related matters. It is governed by the tax rules prescribed by the tax laws of a jurisdiction. Often these rules are different from the rules that govern the preparation of financial statements for public use (i.e. GAAP). Tax accountants therefore adjust the financial statements prepared under financial accounting principles to account for the differences with rules prescribed by the tax laws. Information is then used by tax professionals to estimate tax liability of a company and for tax planning purposes.
Forensic Accounting
Forensic accounting is the use of accounting, auditing and investigative techniques in cases of litigation or disputes. Forensic accountants act as expert witnesses in courts of law in civil and criminal disputes that require an assessment of the financial effects of a loss or the detection of a financial fraud. Common litigation where forensic accountants are hired include insurance claims, personal injury claims, suspected fraud and claims of professional negligence in a financial matter (e.g. business valuation).
Project Accounting
Project accounting refers to the use of accounting system to track the financial progress of a project through frequent financial reports. Project accounting is a vital component of project management. It is a specialized branch of management accounting with a prime focus on ensuring the financial success of company projects such as the launch of a new product. Project accounting can be a source of competitive advantage for project-oriented businesses such as construction firms.
Social Accounting
Also known as Corporate Social Responsibility Reporting and Sustainability Accounting, social accounting refers to the process of reporting implications of an organization’s activities on its ecological and social environment. Social Accounting is primarily reported in the form of Environmental Reports accompanying the annual reports of companies. Social Accounting is still in the early stages of development and is considered to be a response to the growing environmental consciousness amongst the public at large.
Characteristics of financial accounting
- It is historical/backward looking in nature. Transactions are recorded after they have occurred.
- It is monetary. All transaction are recorded in money terms
- It is highly regulated by accounting legislation/rules like G.A.A.P.
- It is mandatory to prepare and disclose financial accounting information.
- It is more useful to external users of financial information. The category of users most targeted by Financial Accounting is that of the shareholders.
- It reports on the performance of the entire organisation.
- It is subjected to audit or independent external examination.
- In financial accounting, cost classification based on type of transactions, e.g. salaries, repairs, insurance, stores etc. In cost accounting, classification is basically on the basis of functions, activities, products, process and on internal planning and control and information needs of the organization.
- Financial accounting aims at presenting ‘true and fair’ view of transactions, profit and loss for a period and Statement of financial position (Balance Sheet) on a given date. It aims at computing ‘true and fair’ view of the cost of production/services offered by the firm.
- In financial accounting, classification of items is based on type of transactions, e.g. salaries, repairs, insurance, stores etc.
- Financial accounting aims at presenting ‘true and fair’ view of transactions, profit and loss for a period and Statement of financial position (Balance Sheet) on a given date. It aims at computing ‘true and fair’ view of the firm
Limitations of Financial Accounting
Financial accounting is the only branch of accounting and it is not prefect. There are large numbers of limitations which open new way to use other tools of accounting. To know what are the main limitations of financial accounting. It is very necessary for accountants . Accountants are often blind to these limitations. So, I am covering its limitation a lot of ground.
Read below and understand
Financial accounting is of historical nature
Net effect of transactions are recorded in financial accounting which has happened in past. These accounts is just postmortem of all events of business in past .These record does not help for future planning and other managerial decisions. Financial accounting shows the profitability of business but it is failure to tell that is it good or bad. Financial accounting is also failure to know the reasons of low profitability position.
Financial accounting deals with overall profitability
Accounts of business are made by a way which shows only overall profitability .It does not shows net profit per product , or per department or according to job . Thus to find difficult to all activities which do not give profit. So, it creates inefficiency in business activities.
Absence of full disclosure of facts
In financial accounting we record only those activities and transactions which we can show or describe in money. There are many other facts of business which are non financial and non monetary like efficient management, demand of products of firm , good relations in industry , good working environments which can not be known by financial accounting .
Financial reports are interim report of business
Financial statements made by financial accounting is the interim report of firm’s all business work but financial position and profitability which are shown in it is not fully true . Due to adopting cost concept, all transactions are recorded on it real cost but by changing in the time; it is the need of time to adjust cost of assets and liabilities according to inflation of market. Because, financial accounting does not records according to inflation so its result does not show true position of business.
Incomplete knowledge of cost
From cost point of view, financial accounting is incomplete. In financial accounting, accountant does not calculate each and every product’s total cost. So, financial accounting does not help to determine the price of product of business.
No provision of cost control
Financial accounting does not help business organization for controlling the cost. Because, there is no provision of controlling cost in it. In financial accounting, we write cost, if we paid any expenses. Thus there is no provision of improvement in financial accounting. Except this, there is no any other way to inspect all expenses.
Financial statements are affected from personal judgment
Many events of financial statements are affected from personal judgement of accountant. Method of calculating depreciation, rate of provision of doubtful debts and stock valuation method are decided by accountant. Thus, financial statements do not show true and fair view of business.